Water resource availability is the major limiting factor for sustainable development in drylands. Climate change intensifies the conflicting water demands between people and the environment and highlights the importance of effective water resource management for achieving a balance between economic development and environmental protection. In 2008, Inner Mongolia, typical dryland in northern China, proposed strict regulations on water exploitation and utilization aimed at achieving sustainable development. Our study is the first to investigate the effectiveness and performance of these long-standing water conservation regulations. Our analyses found that the regulations drove industrial transformation, evidenced by the decreasing proportion of environmentally harmful industries such as coal and steel, and the increasing proportion of tertiary industries (especially tourism). Following industrial transformation, economic development decoupled from industrial water consumption and subsequently led to reduced negative environmental impacts. Based on these results, adaptive strategies were developed for 12 cities by revealing and integrating their development pathways and relative status in achieving sustainable development. Integration and cooperation between cities were proposed, e.g., a water trade agreement between eastern Inner Mongolia (an economically underdeveloped region with relatively abundant water resources) and central Inner Mongolia (an economically developed region with high water stress). Such an agreement may enable the holistic achievement of sustainable development across regions. By integrating the findings of our research, our study presents a reproducible framework for water-management-based sustainable development strategies in drylands.